The issue faced by the Minnesota Supreme Court was whether the insurer had a duty to disclose the insured's interest in obtaining a written explanation of an arbitration award that identified the claims of recovery and the portions of the award attributable to each. Remodeling Dimensions, Inc. v. Integrity Mut. Ins. Co., 2012 LEXIS Minn. 404 (Minn. Sup. Ct., Aug. 22, 2012).
Remodeling Dimensions, Inc. ("RDI") built an addition for the homeowners and installed windows in the original part of the house. After construction began, the homeowners also asked RDI to fix the master bedroom window in the original part of the house.
After completion of the project, the house sustained storm damage. A consultant found significant moisture damage in several areas. The homeowners blamed RDI and commenced arbitration, claiming that defects in RDI's work caused water damage to the house.
RDI tendered to its insurer, Integrity. Defense counsel was appointed to represent RDI in the arbitration. A reservation of rights letter was also sent, stating Integrity questioned whether the homeowners' claims were covered and reserving the right to deny coverage.
The arbitrator awarded the homeowners $45,000 for basic house repairs, $2,000 for flat roof repair, $1,000 for final cleaning and $3,000 for construction management fees. RDI's attorney then requested further written explanation of the award, which was denied as untimely.
Integrity denied coverage of the award. RDI paid the homeowners and then sued Integrity for a declaratory judgment.
RDI conceded the $2,000 for flat roof repair was not covered, but alleged breach of contract for Integrity's refusal to pay the rest of the arbitration award. The trial court granted RDI's motion for summary judgment, concluding that the vague arbitration award made it impossible to determine whether the insurance policy covered any of the homeowners' successful claims. The vagueness of the award was directly attributable to the attorney's failure to request a written explanation of the award. The court of appeals reversed. The attorney hired by Integrity did not have an attorney-client relationship with Integrity, and Integrity was not responsible for the attorney's failure to make a timely request for a written explanation of the award. Further, the homeowners' claims against RDI were not covered.
The Supreme Court reversed the court of appeals and remanded. First, the court considered the impact of exclusion "m", which excluded coverage for property damage to "your work" arising out of the work or any part of it. This provision excluded work performed by RDI on portions of the original house, but did not apply to adjacent walls and structures that had moisture damage caused by the work performed by RDI. So the homeowners' negligent-construction claim for moisture damage caused by RDI to the preexisting wall sand structure of the original home - located adjacent to work performed by RDI - would, if proven, be a covered claim under Integrity's policy.
Next, the court considered whether Integrity was directly responsible for the vague arbitration award, making it obligated to indemnify RDI. The Supreme Court held that when an insurer notifies its insured that it accepts the defense of an arbitration claim under a reservation of rights that includes covered and noncovered claims, the insurer must disclose the insured's interest in obtaining a written explanation of the award that identifies the claims or theories of recovery actually proved and portions of the award attributable to each.
